EBITDA margins in SaaS are terrible

08/04/2017By Sammy Abdullah, CFA

We hear too often about how “SaaS has great margins”, but that’s just not true. The margins in SaaS are terrible as the data below show. The table has 72 publicly traded SaaS companies growing on average 41% YOY with a median enterprise value of $1.6bln – in other words, they’re well past the startup stage of burning cash on sales & marketing just to grow. Even though they’re past the high burn growth stage, the median EBITDA margin is -9% as 45 of the 75 companies are not EBITDA positive.

TTM

TTM

TTM

Market

EBITDA

Name

Ticker

Revenue

EBITDA

FCF

Cap

Debt

Cash

EV Calc

Margin

2U

TWOU

$223

-$18

-$13

$2,430

$14

$143

$2,301

-8%

Athenahealth, Inc.

ATHN

$1,150

$128

$169

$5,590

$280

$71

$5,799

11%

Bazaarvoice, Inc.

BV

$202

-$5

$15

$400

$32

$91

$341

-2%

Benefitfocus, Inc.

BNFT

$243

-$13

-$10

$1,130

$109

$58

$1,181

-5%

Box, Inc.

BOX

$426

-$116

$12

$2,600

$80

$183

$2,497

-27%

BroadSoft, Inc.

BSFT

$348

$26

$67

$1,350

$204

$300

$1,255

8%

Castlight Health, Inc.

CSLT

$107

-$50

-$34

$548

$0

$103

$445

-47%

Cornerstone OnDemand, Inc.

CSOD

$435

-$42

$43

$2,300

$241

$290

$2,250

-10%

Five9, Inc.

FIVN

$171

$3

$7

$1,210

$46

$56

$1,199

2%

Hortonworks, Inc.

HDP

$199

-$233

-$56

$859

$0

$84

$775

-117%

HubSpot, Inc.

HUBS

$294

-$36

$35

$2,650

$1

$123

$2,528

-12%

IntraLinks Holdings, Inc.

IL

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Jive Software, Inc.

JIVE

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Lifelock

LOCK

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LivePerson Inc.

LPSN

$216

$6

$0

$795

$0

$54

$740

3%

LogMeIN, Inc.

LOGM

$618

$128

$221

$6,140

$0

$286

$5,855

21%

Marin Software, Inc.

MRIN

$93

-$9

$4

$45

$3

$33

$15

-9%

Medidata Solutions, Inc.

MDSO

$509

$77

$106

$4,500

$271

$367

$4,404

15%

MobileIron, Inc.

MOBL

$172

-$50

-$1

$419

$0

$89

$330

-29%

New Relic, Inc.

NEWR

$263

-$49

$19

$2,560

$0

$206

$2,354

-19%

Proofpoint, Inc.

PFPT

$442

-$17

$135

$3,750

$378

$429

$3,698

-4%

Qualys, Inc.

QLYS

$205

$49

$83

$1,490

$0

$245

$1,245

24%

RealPage, Inc.

RP

$593

$89

$141

$3,200

$121

$60

$3,261

15%

RingCentral, Inc.

RNG

$405

-$12

$34

$2,620

$0

$150

$2,470

-3%

salesforce.com, Inc.

CRM

$8,860

$445

$2,340

$6,465

$2,540

$3,220

$5,785

5%

ServiceNow, Inc.

NOW

$1,630

-$32

$546

$1,871

$1,140

$1,690

$1,321

-2%

Splunk, Inc.

SPLK

$1,010

-$288

$208

$8,320

$84

$1,090

$7,314

-29%

SPS Commerce, Inc.

SPSC

$207

$23

$28

$992

$0

$158

$834

11%

The Ultimate Software Group, Inc.

ULTI

$823

$63

$167

$6,720

$9

$84

$6,645

8%

Veeva Systems Inc.

VEEV

$582

$141

$177

$8,920

$0

$664

$8,256

24%

Wix.com Ltd.

WIX

$356

-$39

$66

$2,790

$1

$186

$2,605

-11%

WorkDay, Inc.

WDAY

$1,700

-$242

$366

$21,080

$541

$2,120

$19,501

-14%

Zendesk, Inc.

ZEN

$337

-$84

$27

$2,900

$0

$248

$2,652

-25%

Secureworks

SCWX

$443

-$27

-$10

$887

$0

$92

$795

-6%

Appfolio, Inc.

APPF

$115

$0

$16

$1,190

$0

$27

$1,163

0%

Atlassian Corporation

TEAM

$620

-$16

$199

$8,070

$0

$550

$7,520

-3%

Twilio

TWLO

$305

-$41

$7

$2,640

$0

$289

$2,351

-13%

Instructure

INST

$122

-$49

-$31

$934

$0

$39

$895

-40%

Mindbody, Inc

MB

$160

-$9

$4

$1,200

$15

$224

$991

-6%

Shopify

SHOP

$444

-$30

$17

$9,100

$0

$396

$8,704

-7%

Xactly

XTLY

$97

-$12

$1

$504

$13

$44

$473

-13%

Nutanix

NTNX

$681

-$351

$10

$2,560

$0

$350

$2,210

-52%

Apptio

APTI

$168

-$23

-$2

$705

$0

$111

$594

-14%

Blackline

BL

$135

-$14

-$2

$1,990

$0

$101

$1,889

-10%

Coupa Software

COUP

$145

-$32

-$4

$1,620

$0

$238

$1,382

-22%

Okta

OKTA

$182

-$86

-$37

$2,090

$0

$224

$1,866

-47%

Alarm.com

ALRM

$276

$47

$23

$1,760

$74

$63

$1,771

17%

Alteryx Inc

AYX

$96

-$20

-$4

$1,180

$0

$164

$1,016

-21%

Amber Road

AMBR

$75

-$12

-$2

$254

$24

$15

$263

-16%

Appian Corporation

APPN

$135

-$15

$0

$1,170

$20

$35

$1,155

-11%

Blackbaud

BLKB

$745

$126

$160

$4,330

$356

$14

$4,672

17%

Callidus Software

CALD

$216

-$8

$29

$1,580

$0

$183

$1,397

-4%

Channel Advisors

ECOM

$115

-$7

$9

$275

$1

$63

$213

-6%

Cloudera

CLDR

$284

-$333

-$88

$2,270

$0

$222

$2,048

-117%

Ebix

EBIX

$306

$111

$89

$1,820

$309

$123

$2,006

36%

Ellie Mae

ELLI

$394

$82

$114

$2,970

$0

$334

$2,636

21%

Everbridge Inc

EVBG

$83

-$10

$10

$659

$0

$40

$619

-13%

FireEye

FEYE

$720

-$219

-$9

$2,610

$751

$875

$2,486

-30%

HealthStream

HSTM

$238

$24

$47

$753

$0

$116

$637

10%

J2 Global

JCOM

$928

$376

$269

$4,080

$828

$187

$4,721

40%

Kinaxis

KXSCF

$121

$20

$33

$1,500

$0

$142

$1,358

17%

Medidata Solutions

MDSO

$509

$77

$106

$4,470

$271

$367

$4,374

15%

Mimecast

MIME

$187

$2

$33

$1,580

$2

$112

$1,471

1%

Mulesoft

MULE

$235

-$54

$1

$2,820

$0

$256

$2,564

-23%

NantHealth

NH

$103

-$147

-$65

$520

$192

$125

$587

-142%

Paycom Software

PAYC

$359

$79

$109

$4,170

$32

$93

$4,109

22%

Paylocity Holding

PCTY

$284

$17

$47

$2,340

$0

$101

$2,239

6%

Q2 Holdings

QTWO

$161

-$19

-$7

$1,600

$0

$82

$1,518

-12%

Tabula Rasa Healthcare

TRHC

$102

$4

$4

$269

$2

$3

$267

4%

Talend

TLND

$116

-$26

$4

$1,090

$0

$95

$995

-22%

The Trade Desk

TTD

$226

$59

$35

$2,260

$26

$107

$2,179

26%

Upland Software

UPLD

$78

$9

$9

$500

$57

$19

$538

11%

Workiva

WK

$186

-$34

$11

$807

$21

$65

$763

-18%

Yext

YEXT

$134

-$45

-$24

$1,130

$0

$134

$996

-33%

Zix

ZIXI

$62

$12

$15

$290

$0

$23

$267

20%

Average

$471

-$10

$84

$2,655

$126

$274

$2,508

-9%

Median

$237

-$12

$16

$1,790

$1

$124

$1,644

-6%

Why are these companies burning cash? Because while the variable costs of SaaS are very low (hosting, servers, etc), the fixed costs are very high, especially for engineering talent and developers. Given the speed at which technology becomes obsolete, the hiring of engineering/dev talent never really ends as each company has to constantly improve and evolve its product.

So why does SaaS work? Because traditionally SaaS companies collect their bookings up front. In other words, if you sell a 1 year contract for your software, the norm is to collect the cash up front for all 12 months as opposed to collecting 1/12th of the contract each month. It’s the reason that even though 45 of the 75 companies are EBITDA negative, only 19 of the 75 are cash flow positive. Likewise, while the median EBITDA of the data set is -$12mm, the median cash flow is $16mm.

Make sure as a SaaS business you’re collecting the full amount of the booking up front if your clients are enterprises. They’re used to paying for software up front, so don’t let them get away with monthly payment terms.